Hello and welcome to today’s Barnes & Noble Education fiscal 2023 second quarter earnings conference call. My name is Bailey and I’ll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the call over to today’s host, Hunter Blakenbaker, Vice President of Investor Relations. Hunter, please go ahead.

Good morning and welcome to our fiscal 2023 second quarter earnings call. Joining us today are Mike Huseby, CEO; Tom Donohue, CFO; Jonathan Schar, Executive Vice President, BNED Retail and President, Barnes & Noble College; and David Henderson, President of MBS. Before we begin the call, I’d like to remind you that statements we make on today’s call are covered by the Safe Harbor disclaimer contained in our press release and public documents. The contents of this call are the property of Barnes & Noble Education and are not for rebroadcast or use by another party without prior written consent of Barnes & Noble Education. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. Now I’ll turn the call over to Mike Huseby.

Thanks Hunter and good morning everyone. As evidenced by our second quarter results, the higher ed industry continues to evolve at a rapid pace and we continue to adapt our offerings to ensure that both BNED and our customers are on a path for mutual success. Given the rapidly evolving market, I’d like to focus my comments today on three areas. First, we’ll provide an overview of our second quarter financial results. During the quarter, our key strategic areas of First Day Complete, or FDC, and general merchandise performed well; however, the traditional à la carte course material model declined at a faster pace than we anticipated. Second, we’ll discuss the significant cost reduction initiatives that we are implementing across our organization. These initiatives involve streamlining our operational structure and aligning our capital allocation decisions to our highest return opportunities that accelerate growth and drive operating efficiencies. Finally, we’ll outline the decisive actions we are taking to accelerate our transition to the FDC model, which removes barriers for students by providing greater access, affordability, convenience and ultimately greater academic success. It also helps colleges and universities meet and exceed their highest priority goals, and for BNED it provides more predictable, higher margin revenue. With that, let’s take a closer look at the second quarter. Our team continued to navigate the ongoing challenges in the higher ed space, particularly the continued negative enrollment trends as well as unprecedented increases in operating and financing costs. The most profound insight we learned acutely from our second quarter results is that even though our First Day Complete model grew significantly, the traditional à la carte course model declined at a faster pace than we anticipated. Factors contributing to this decline included faculty assigning fewer course materials per class and many students electing not to purchase course materials at all. Despite these headwinds, consolidated revenue and adjusted EBITDA were essentially flat versus last year, primarily due to the growth of our higher margin FDC and logo general merchandise businesses. Nonetheless, our expectations entering the second quarter were higher than what we realized given that this was our first operating rush in two and a half years without the cloud of a material pandemic outbreak hanging over it. The engine that drives our overall business is our retail physical and virtual stores and websites, as reported in our retail segment. Total retail revenue of $598.6 million was down 1.7% year-over-year. Gross comparable course material revenue, including product sales and rental income, was down 4.6% and the primary contributor to the overall revenue decline. Mitigating but not completely offsetting the decline in à la carte course material sales was the success of our First Day model. The First Day model includes FDC, which includes both physical and digital coursework, and First Day by course, which is primarily digital. Second quarter FDC revenue grew 97% to $89.9 million and 111 of our campus stores utilized FDC for the fall term, representing undergraduate enrollment of approximately 545,000 students. The FDC Equitable Access Program removes barriers for students by providing greater access, affordability, convenience and ultimately greater academic success. This differentiated strategy is increasingly resonating with institutions. Our pipeline of schools considering FDC is very robust and seven more stores are launching FDC this upcoming spring rush, including University of Memphis and University of Connecticut, bringing total undergraduate enrollment for spring to approximately 588,000 students. Moving onto general merchandise, total GM sales were up 4.5% on a gross comparable basis. Logo and emblematic, which account for approximately 60% of general merchandise revenues, saw continued strength while supply products, which includes bigger ticket items like laptops and tablets, saw some softness. While a relatively small contributor to total GM revenue, supply products revenue is most directly correlated to the broader retail industry headwinds. Within GM, we see many opportunities to improve our execution and customer experience, including additional upside from our partnership with Fanatics and Lids as our integration with their capabilities matures. DSS revenues increased 2.3% to $8.5 million. The lower than anticipated increase in revenue was primarily driven by product offering mix as well as lower than expected web traffic. DSS is comprised of Student Brands and Bartleby products. Since our August 2017 acquisition of Student Brands, it has generated steady free cash flow which has been used to finance the growth of Bartleby’s suite of digital learning and study tools. DSS grew significantly through the pandemic, including more than 30% year-over-year revenue growth in fiscal ’22, and in recent years we have made significant investments to support this growth. That said, with our focus on our highest return initiatives, we are shifting our priorities within DSS to maximize our past investments in existing assets with a more rigorous approach to profitability. Moving onto wholesale, revenue declined 2.5% during the quarter while EBITDA increased by $0.4 million. Wholesale continued to be impacted by supply constraints from the lack of used book inventory, lower overall demand due to declining enrollment, and the transition to digital course materials. As we concluded the second quarter, we did not see the anticipated improvements to the operating environment and recognized the need to take swift and decisive action. We started with a deep analysis of all products and offerings as well as our markets, customer needs, operations, investment requirements and expected returns. This work has provided clarity on where we need to create efficiency and strategically invest to deliver on our mission, deepen our strategic moat, and drive our long term growth and profitability. The first part of our plan involves aligning our overall expenses and resources with current market trends. We are taking actions across the company to drive efficiencies, simplify organizational structure, and further reduce non-essential costs. For example, within DSS we are taking a much more rigorous approach to profitability. We are refining and optimizing marketing and content spend, streamlining data infrastructure processes while continuing to test pricing, positioning and features for increased subscriber conversions and engagement. These actions may impact short-term growth but we will be on a stronger foundation for fiscal year '24 and beyond. We expect to achieve free cash flow breakeven in our DSS segment in fiscal year '24. Within wholesale, we are rationalizing the workforce to align costs with the declining revenue base and the industry headwinds I mentioned earlier. MBS remains a valuable part of our FDC fulfillment engine. Also, MBS’ experienced and dedicated team plays a lead role in managing our retail virtual bookstore operations and relationships, as well as all retail customer care. MBS’ initial efforts to transition our retail virtual bookstores to FDC are encouraging and will continue. We see a long tail in physical courseware demand and MBS’ wholesale capabilities are proving to be and will continue to be a key competitive differentiator for BNED. Within retail, we are significantly adjusting staffing and related costs as well as sales expectations for the remainder of this fiscal year to align with our analysis of retail’s second quarter sales levels and trends. These cost reductions required difficult decisions and included many valued long-tenured colleagues. We want to underscore how grateful we are for the hard work and contributions of all the impacted employees by these actions, which are necessary to right-size our organization and enable us to invest in our highest conviction growth opportunities. We expect annual run rate savings of $30 million to $35 million from these cost reduction activities once fully implemented. In the current fiscal year '23, we expect to save $10 million to $15 million from these cost actions. We intend to reinvest most, if not all of these savings back into the business in a very targeted manner to fund the advancement of our strategic priorities. Our highest and certainly most exciting priority initiative is the acceleration of the market transition to the FDC sales model. We have led the market change to equitable access over the past five years and in that time, we have invested in advanced proprietary software such as our adoption and insights portal to provide seamless integration with an institution’s systems, like registration and single sign-on, and personalized mobile optimized student-facing solutions. These investments have allowed us to differentiate and be the clear marketplace leader in equitable access. They also provide the confidence that we can execute on serving a significant number of new FDC accounts with near-flawless execution at higher scale. Based on the positive outcomes that FDC provides our college and university partners, their students, content providers and BNED, we are moving quickly and decisively to accelerate FDC adoptions. We have developed a surgical approach and implementation plan to engage with and transition many more institutions to FDC. For many of our institutional partners, it will be the only model we offer, and we expect the vast majority of our institutional partners and their students to implement the FDC model over the next two fiscal years. We have a substantial pipeline of additional schools seriously considering transitioning to FDC for the fall '23 term, and we will engage with all of our schools in some fashion in this discussion as we execute our plan over the next several months. To accelerate the transition to this model, we are investing in additional sales, marketing, operational support resources and technology to further streamline the FDC customer experience. We will continue to invest in our services and expand our strategic moat as we help facilitate the student academic journey and support improved student well-being and academic success. As we transition from offering great products to making a meaningful impact on the highest priority goals at the colleges and universities we serve, our value to the industry will increase and strengthen retention and improve customer lifetime value. We see the inclusive and equitable access offerings becoming the de facto model of the industry. The access, achievement, mental health and affordability benefits to students are clear. The economic benefits that institutions receive are compelling, and a much more predictable, higher margin revenue growth is a critical part of BNED’s successful path forward with our institutional partners, whose success and ours are truly shared. In closing, BNED is one of the very few strategic assets in the higher ed industry that already has the scale, unique asset mix and competitive positioning to truly meet both the digital and physical demands of the higher ed institutions and students we serve. Whether it’s facilitating a better student academic journey, delivering superior customer experiences, or building lifetime relationships with parents, fans, and alumni, our unique approach and set of proprietary assets allow us to support our partners in a more relevant and highly differentiated manner. We are operating with urgency and decisive action to accelerate market adoption of the FDC model. We’re streamlining the company structure and we’re taking costs out to allocate capital to our highest priority businesses. We have a clear path forward and we are confident in our ability to create durable growth and shareholder value.

Thanks Mike. Please note that the second quarter of fiscal 2023 consisting of 13 weeks ended on October 29, 2022. All comparisons will be to the second quarter of fiscal 2022 unless otherwise noted. Total sales for the quarter were $617.1 million compared with $627 million the prior year. The decline of $9.9 million or 1.6% was comprised of a $10.3 million decrease from the retail segment, a $0.6 million decrease in the wholesale segment, and a $0.2 million increase from the DSS segment. Retail gross comparable store sales decreased 2.2% during the quarter. Gross comparable course material sales were down 4.6% as the broader industry headwinds were mitigated by the rapid growth of our First Day offerings. BNC’s inclusive and equitable access programs increased revenue by 49% to $143.2 million during the quarter as compared to $96 million in the prior year period. Within this, FDC revenues increased 97% to $89.9 million. Gross comparable general merchandise sales increased 4.5%. Our general merchandise business benefited from strength in logo and emblematic sales offset by softness in more expensive items like laptops and tablets. Net sales for the wholesale segment decreased $0.6 million or 2.5% to $21.1 million. The decrease was primarily due to lower gross sales impacted by supply constraints resulting from the lack of textbook purchasing opportunities during the prior fiscal year, the continued shift from physical textbooks to digital products, and lower demand from other third party clients partially offset by lower returns and allowances. DSS sales grew $0.2 million or 2.3% to $8.5 million. The second quarter consolidated gross margin rate was 23.5% compared to 23.2% in the prior year period. This was primarily due to higher retail gross margins which benefited from a favorable sales mix of higher margin general merchandise sales. Our selling and administrative expenses were down $0.8 million to $107.1 million. The decrease was primarily due to lower incentive plan compensation costs offset by higher payroll in corporate and new and closed stores. As Mike discussed, we recently began taking actions to optimize our cost structure and streamline our operations. We expect to achieve $30 million to $35 million in annualized run rate savings once fully implemented and $10 million to $15 million in FY23. Savings will be in both cost of sales and S&A, with most if not all of the savings reinvested into the business. We expect to recognize a charge of approximately $5 million to $6 million primarily related to severance and other termination benefits during the third quarter of fiscal 2023. Moving onto the balance sheet, our cash balance was $19.1 million at the end of the quarter with outstanding borrowings of $252 million, as compared to borrowings of $183.3 million in the prior year period. This increase is mostly due to cash use and the timing of receivables associated with the significant growth of our First Day offerings. Schools generally remit payment for students enrolled in First Day courses after their student drop/add dates. Maintaining our balance sheet strength and flexibility is one of our top financial priorities. With the strategic actions and cost reduction initiatives we have implemented, we have a clear path to EBITDA growth in fiscal 2023 and fiscal 2024. Capex for the quarter was $10.8 million, an increase from $9.9 million in the prior period. Currently our retail segment operates 1,399 college, university and K-12 school bookstores, comprised of 793 physical bookstores and their ecommerce sites, as well as 606 virtual bookstores. Moving to guidance, given our results to date and our expectations for the second half, we now expect FY23 adjusted EBITDA of $20 million to $30 million. This represents non-GAAP adjusted EBITDA growth of $25 million to $35 million compared to fiscal year-end 2022. The company’s retail segment will be the primary driver of non-GAAP adjusted EBITDA growth driven by new First Day Complete implementations, growth within our general merchandise business, and new business wins.

The first question today comes from Ryan MacDonald from Needham. Please go ahead, your line is now open.

Hi Mike and Tom. Thanks for taking my questions. Maybe a first one on the go-forward plan here. Obviously great to hear about the cost saving initiatives that are going into place, but it sounds like you’re going to be reinvesting a lot of those cost savings and really accelerating the adoption of First Day Complete here. One, can you talk about how you drive that accelerated adoption? Do you have to do anything around incentivization from a pricing perspective with the pipeline of university partners that you have; and two, as you think about accelerating that adoption and getting that adoption two years from now, can you remind us of what the unit economics on First Day Complete are and the confidence you have that this accelerated plan will get us to profitability levels that are above pre-pandemic levels, where they were at? Thanks.

Ryan, it’s Mike. I’ll make some general comments on that first, and then John Schar, who is our President of Retail, can make some additional comments. One thing I would say about the unit economics is that in connection with our fiscal year ’22 earnings release, we did post a fairly detailed review of the economics and how they compare, and we can talk more about it. But I think the main answer to your question is that it’s very, very clear to us that the best model for us to offer to our market for courseware delivery is First Day Complete, and we’ve made a decision that based on the scale we’ve achieved, the conversations we have with the schools that we serve, both First Day Complete and others, that we have to lead the industry towards that model so that we are presenting the best model to customers. We’re not doing this to customers, we’re doing it with them. Whenever there is a transition, First Day Complete operates similarly to a subscription model regarding its offerings and how it is organized for student benefit. With this type of model comes a responsibility; we have a duty as a leader in this industry to support schools and secure the best courseware and general merchandise. We are committed to doing everything possible to enhance that model, and that is our focus. There’s been a very detailed school-by-school analysis of how we approach this. John and his team have done an excellent job collaborating with an outside party to thoroughly examine this and develop a comprehensive plan. We’re already initiating conversations with schools and we will expand that communication very soon. I’ll ask John to add any further comments.

Thank you, Mike and Ryan, for the question regarding First Day Complete. Looking at the broader picture, our upcoming fall term marks the first large-scale implementation of First Day Complete. We have 111 stores involved, which account for nearly 550,000 undergraduate enrollments. We are receiving positive feedback from institutions across all higher education sectors, including four-year private and public schools, two-year public colleges, and various types of institutions. We are witnessing considerable success in student outcomes at these schools. Student feedback indicates they feel better prepared, and this model supports their overall wellbeing and academic success. Based on this, we believe the impact will continue to grow and accelerate. Only four years ago, we only had four institutions representing almost, I think, 16,000 in undergraduate enrollments, so we’ve been able to scale this in a significant way. We’re also investing and have invested significantly in technology to create a seamless experience and transition to this. We’ve leveraged an institution’s single sign-on system, registration system, student information systems to have a personalized experience, and now we’re investing in more sales, as we said in the remarks, sales, marketing, operational support in addition to technology to allow us to scale, and really it’s allowed us to scale the number of individual conversations we have with institutions to understand how we meet their needs and how we make a bigger impact on the goals that are most important to them, whether that’s driving the four and/or six-year graduation rate, attacking student wellbeing or any other goal. We think we can accomplish that and have the team, the focus and the resources now to really execute that, drive First Day Complete growth for next term, and then the vast majority of our institutions in two years.

Ryan, it’s Mike. I want to add that the consequences of not taking this step were clear in the second quarter. This situation affects not only our financial results but also the students and the schools because the schools are part of our economic model. The decline in the à la carte model indicates that many students, as shown by our research and discussions, are not buying the course materials necessary for their success. This approach returns control of the curriculum to the schools and faculty, rather than allowing the market to create chaos as digital offerings grow in market share. It establishes a meaningful contract and relationship with the schools that benefits both them and us while also supporting the students.

That’s helpful color, I appreciate that. Maybe on the cost optimization, Tom, you mentioned that it’s going to be a mix of savings in cost of sales and then S&A. As you looked across retail, wholesale, DSS, can you maybe just help us out and give us a sense of the magnitude of where you’re making the cuts across those three segments as we think about the P&L moving forward?

Yes, thanks Ryan. I haven’t necessarily broken it out. We’re in the process of doing it. It’s a lot of people, it would be people in all three segments, and when you think more on the cost side as opposed to just the people, it’s really switching to the FDC model both in terms of service and support, and really trying to re-focus the capital investment in that area. As we look across, it will certainly be people but it also gets down to the retail level, the store level in terms of store labor and the effects that it has there.

Yes Ryan, it’s Mike. I would answer the question by saying that we discussed each of the business units in the script. From a relative perspective, the number of employees affected is likely more significant in DSS and MBS, with some impact in corporate. As we mentioned and as John noted, we are focusing our investment on our highest return areas and driving our inclusive access model. While there are reductions across the business, the emphasis is on directing savings towards those sectors where we need to be more rigorous about profitability, and then reinvesting those savings to enhance our core business where we see the highest return on investment.

Makes sense, okay. Maybe just one more from me. Mike, you mentioned that an increasing number of students are not purchasing the necessary course materials. I would think that structurally, this could benefit the DSS business and the Bartleby business. I'm curious about what you're observing in this regard, what might be causing the slowdown, and if you're seeing any improvements in the pipeline for school-related Bartleby adoption deals. Thanks.

Yes, thanks. I’ll answer the second question first. In terms of the pipeline for what we’re calling institutional, where we have several schools now signed up, that is continuing. As we’ve said, though, the main emphasis on DSS is really focusing on more rigorous profitability, getting that DSS segment to cash flow breakeven. Within DSS, as you know, there really are two businesses: the Student Brands business, which is growing, and then the Bartleby business, where we tried a lot of things in the fall in terms of new pricing and some new approaches. Some worked well and some didn’t work as well as we thought they would, some of which has to do with the environment we’re in currently, but we learned a lot in the fall and we’re making some significant changes to, I guess I would say, take advantage of the competitive differentiation we have and the ability to offer a different price point in particular, and also leveraging our footprint in a more zealous way in-store and on web than we probably did in the fall. We’re reining in the capex by not taking as broad questions from international sources, really focusing more on the U.S. and our footprint and becoming much more focused on Bartleby in terms of rationalizing the business to fit the current circumstances and our need to grow to focus on profitability. It’s been really set up over the last six months to a year in terms of the activities and intentionally to develop and asset for longer term growth. With our financial capacity and the focus on really the core business, we’re reining in that in a bit. Still have great people working there and I think we have great opportunity to set a foundation that positions us for more growth going forward, but the visitors to the sites were down, and that’s an industry phenomenon. We work with an external company that provides insights about our sites and our competitors in the area, and we noticed a general decline in traffic, which is something we need to address and we have plans to improve it. I am very proud of Student Brands for their progress over the past 18 months, led by a capable team proficient in SEO and machine learning. This is a valuable asset within DSS that we believe enhances our efforts with Bartleby and will eventually benefit our core business. We are implementing significant changes in Bartleby in the short term for spring and we hope to see improved results. While we cannot guarantee success, we are committed to this initiative.

Thanks for taking my questions. I’ll hop back in the queue.

Thank you. The next question today comes from Alex Fuhrman from Craig Hallum Capital Group. Please go ahead, your line is now open.

Hey everyone, it's great to speak with you. I wanted to ask about the cost reduction initiative. It seems that after the $10 million to $15 million you anticipate realizing for the rest of this year, there’s an additional $20 million expected in the long term. How long do you think it will take to realize that? Will the majority of that extra $20 million come in fiscal ’24? Also, Tom, I believe you mentioned that your plan is to reinvest most of these savings into other initiatives, so how should we consider the impact on the P&L from those cost savings?

Yes, thanks Alex. To clarify, considering we are already six months into the year and approaching seven if we include November, the expected range of 10 to 15 million really reflects the remaining run rate for fiscal year '23. When you annualize that, you arrive at approximately 30 to 35 million. We are currently implementing various steps and initiatives; some have already been executed, while others are still in progress. This aligns with our expectations, and you should anticipate that the full annualized impact of the 30 to 35 million will be reflected in the fiscal year '24 figures.

Yes Alex, one more comment I would make is that having been through the pandemic and having taken out substantial costs in our shared services and retail right before the pandemic and actually bled into the pandemic in terms of people, we had a perk back on the spring of 2020 where 70 people accepted that. The point is, it’s given us more flexibility in terms of fixed versus variable costs in our labor force so that we can move more quickly now than we could have pre-pandemic, so that’s why we’re confident in the numbers and getting the benefit now, and then the annualized savings.

Yes, and Alex, in terms of reinvesting, it’s really to support the initiatives, with the highest priority being the conversion of schools to First Day Complete.

Okay, that’s really helpful. Thank you both. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time, so I’d like to pass the conference back over to Hunter Blakenbaker for any closing remarks. Please go ahead.

Great, thank you Bailey, and thanks everyone for joining us today and for your continued interest in BNED. As a reminder, our fiscal third quarter earnings will be in early March. Thanks everyone for joining.

This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.